Reference no: EM133082432

1. There are two goods, food and clothing, and two factors, capital and labor, used to make these goods. Both goods are made by this country to begin with. The clothing industry is capital intensive relative to the food industry. Once capital is invested in an industry, it takes a form which makes it useless in the other industry. Thus, in the medium run, the capital in one industry is not usable in the other industry or is industry speci?c. In the long run, capital can move between industries. Labor is ?xed in total, but it can move from one industry to another in a country in the medium and in the long run. The economy is small: That is, it faces given prices at which it can trade. It imports food and exports clothing at these prices.

a. In this economy, what is the effect on the real and nominal returns to labor of a tariff on the import of food in the medium run? Why?

b. What is the effect on the real and nominal returns to labor of a tariff on the import of food in the long run? You may assume that both goods continue to be made, that is, there is no specialization.

c. Would you expect labor to favor a tariff on food? Why? Be sure to explain the conditions under which it would favor protection.